Singapore REITs - UOB Kay Hian 2018-04-12: 1Q18 Results Preview

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Singapore REITs SREIT 1Q18 Earnings Preview CAPITALAND MALL TRUST C38U.SI MAPLETREE INDUSTRIAL TRUST ME8U.SI PARKWAYLIFE REIT C2PU.SI

Singapore REITs - 1Q18 Results Preview

• Watch out for the pick-up in the office and hotel segments’ performances while the retail and industrial logistics segments should slow down in the upcoming results.
• Despite concerns over rising interest rates, we believe the growth pick-up will offset the impact of higher financing cost. REITs are also more insulated against rate hikes with a higher proportion of their financing in fixed-rate and longer-term maturity instruments. 
• Preferred picks: CDREIT, CapitaLand Commercial Trust and Ascendas REIT. Maintain OVERWEIGHT.

WHAT’S NEW

• We highlight key developments to watch out for in the upcoming 1Q18 results.

ACTION

Maintain OVERWEIGHT. 

• Watch out for the pick-up in the office and hotel segments’ performances while the retail and industrial logistics segments should slow down in the upcoming results. 
• Despite concerns over rising interest rates, we believe the growth pickup will offset the impact of higher financing cost. REITs are also more insulated against rate hikes with a higher proportion of their financing in fixed-rate and longer-term maturity instruments. 
• We are most upbeat on the hospitality and office segments, and cautious on retail, industrial factory, and warehouse spaces. 
• Top picks are CDREIT, CapitaLand Commercial Trust and Ascendas REIT. 

ESSENTIALS

• We have fine-tuned our assumptions for REITs, mainly adjusting rent reversions (-2% to +5%), interest cost (0-50bp), occupancies (0-10bp) as well as factoring in contributions from recent acquisitions. 
• There are no changes in recommendations but target prices have been adjusted.

Impact of interest rate hikes cushioned by fixed-rate debt and longer maturities.

• With the Fed signalling two more rate hikes in 2018, S-REITs are likely to face higher financing costs in the near term. However, we believe the S-REITs under our coverage will emerge more resilient compared to the last cycle during the global financial crisis, with 55-89% of their total debt locked in as fixed-rate, with an average debt maturity of 3.3 years in 4Q17 (vs 2.1 years in 4Q08).

Hospitality among our bullish picks; RevPAR expansion of 4-9% p.a. 

• Backend-loaded 4Q17 supply showed hopeful signs of well-absorption (with new luxury hotels sticking to their price aspirations) and ADRs holding firm. 
• Looking ahead, we see muted supply pipeline from 2018 amid robust demand from a surge in Chinese and Indian leisure travellers and returning corporate demand (led by IT, pharmaceuticals, aviation precision manufacturing and government sectors). These will drive occupancies higher (towards 90% in 2020F), and tilt pricing power (3-5% in 2018-20F) back to hotel operators, according to our projections. 
• We already see occupancies picked up in the Singapore portfolios of CDREIT (+1.3%) in FY17 and Frasers Hospitality Trust (+0.8%) in 1QFY18, which could continue rising amid tighter demand-supply dynamics.

Office segment to ride on cyclical recovery. 

• Total net absorption for 2017 rose to 2.07m sf, the highest since 2013 and 68% higher than the average 5-year absorption level of 1.23m sf, according to CBRE. Grade-A rents surged 3.3% q-o-q and y-o-y to S$9.40.
• On the back of stronger pre-commitment levels in new office developments (i.e. growing awareness of the reduced options available to occupiers in the next few years), landlords are becoming more ambitious on rental expectations.
• Watch out for rent reversions (up 5-10% this year, based on our estimates) benefiting Keppel REIT and CapitaLand Commercial Trust. The higher signing rents will also benefit CapitaLand Commercial Trust albeit later as it has only 6% of its Singapore office leases expiring (and uncompleted) in 2018 (vs 24% in 2019).

Retail challenged structurally amid signs of stabilisation; muted rental growth of 0- 3%. 

• With the migration of retail online, a painful restructuring is taking place. Principals are connecting with consumers directly (i.e. replacing the middlemen physical retailers). In the face of an existential threat, landlords are showing greater willingness to share risk with their tenants, by altering their rental structures (we see turnover rents gravitating from the current average of 5% towards 20% of overall rents). As a result, mall operators, like CapitaLand Mall Trust, no longer just aim for the best-paying customers, but going for those which can trade well in the market. 
• To boost competitiveness of the malls, landlords also want to bring in the right concepts, like experiential retailing, value-added services (tuition centres and libraries), and even “Click & Collect Lounges” (help malls gain continuous exposure to online-users). Until the right balance is found between online and offline channels, retail rents will be under pressure. However, we see some positive signs of stabilisation in the near term, aided by stronger retail sentiments on the back of an improving economy (GDP growth of 1.5-3.5% by MTI).
• The growing visitor arrivals (+3.0% p.a. according to our estimates), later-than-anticipated GST increase (to rise from the current 7% to 9% in 2021-25), Singapore bonus “hongbao” recently announced during Budget 2018, and modest supply over the next three years (with exception of Jewel Changi Airport) should also lend support to more stable retail rents. 
• Watch out for CapitaLand Mall Trust (rents have turned negative) and Frasers Centrepoint Trust (still positive but declining rents) for signs of rental stabilisation.

Industrial: Bright spots in business park and high-tech segments. 

• Rents for business parks in the city fringe (which has higher quality offerings and better locations) increased 0.9% q-o-q to S$5.60psf/mth, while rents for the rest of the island maintained at S$3.70psf/mth in 4Q17, according to CBRE. With relatively little supply coming forward, and spill-over demand from rising office rents, business parks (especially those in city fringe) should continue to see rental growth upside. 
• Hi-tech rents remained steady at S$3.15psf/mth, with the sector enjoying healthy leasing for 2017, supported by expansionary demand from advanced electronics, precision engineering and chemicals.
• We see Ascendas REIT well-positioned among Industrial REITs, with good exposure to business park (17%) and hi-specs industrial (16%), by value of its investment properties.
• We continue to remain cautious on factory and warehouse spaces, which saw rents declining 3.6-4.6% and 3.0-3.9% y-o-y respectively in 4Q17 as the market absorbed a larger upcoming supply. Rentals are likely to stabilise in 2018 due to improving production levels (industrial production index forecast to improve by 5.6% y-o-y in 2018, according to Oxford Economics) and modest supply pipeline.

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2018-04-12

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